Prof. Patrick O. Connelly: Value and Enhance Your Credit I.Q. (C.I.Q.)

Designing and executing the best possible career begins with a series of accomplishments including understanding and successfully executing the tasks for which you were hired, training and educating yourself in areas extending beyond your core function, and demonstrating a willingness to perform to a standard that exceeds your peers; further to train subordinates to act in similar fashion. Each of these actions solidify and enhance associate credit I.Q., Credit Information Quotient…

In this document, the following subjects are discussed:

  • Credit, What Is It?
  • Credit Granting, What process?
  • Where Does an Associate Fit into the Process?
  • What Are The Major Company/Group Interactions ?
  • Specimen Case
  • Comparative Expectations

Credit (KRED’IT)

Let us begin by establishing just where credit fits into the overall business process.  YourCo (YC), as with any other “for profit” companies doing business within a free enterprise system, wants to maximize profitable selling to willing (and hopefully honest) buyers.

Since selling exclusively on cash terms in a highly competitive market may be relatively constraining, the use of selling on open terms is desirable.  Therefore, by complementing cash selling, credit card selling, or other forms of secured selling, with selling on open terms, the volume of sales can be increased to a more desirable and more consistent level.  This requires an extension of credit.

So what is credit, anyway?

CREDIT, (sales on open terms) is basically selling on trust and good faith.  By definition, it is the immediate (or nearly) acquisition of economic value, in return for the promise of future repayment of economic value.

Historical Credit Granting

The history of credit granting dates back several thousand years, some say to Pre-Roman times to the Phoenicians, who plied the Mediterranean Sea trading goods throughout the then-known world. Further discussion of the history is outside the scope of this document. But…

The concept of granting credit on open terms does involve four key elements :

  1. Risk (for our purposes, primarily default risk, but on occasion political, or other risk)
  2. Good faith: the willingness of the buyer to repay the economic value to the seller.
  3. Economic value: the actual financial value of that which is sold into the market including all taxes and costs associated with getting it to the customer.
    1. Of the commercial customer: the ability of the buyer to repay the economic value by reason of buyer’s business performance.
    2. Of the end user: the ability of the buyer to recover economic value from his customer thus enabling business continuity…and payment of HIS liabilities (including his debt to YourCo)
  4. Time
  • Time value of money: both the cost of bringing YourCo economic value to market and, the cost associated with payment delay.
  • The cost to the seller in bringing the economic value to market is built into the pricing for the value sold. However, payment delays beyond stated contractual terms of sale (past due A/R balances) — compound the cost and constitute the reason most often given for enterprise failure (even bad debt loss by reason of catastrophic event).
  • risk of open terms and the probability of economic loss: where the debt extends beyond the instant of exchange of economic value sold and received payment, there is risk (of non-payment) with every passing instant. Therefore, it is necessary to assess the level of risk, which results in the determination of the probability of repayment within terms, for every transaction accepted on open terms, or credit.

It is by way of understanding each of these four concepts individually, and the credit process in the aggregate, that you will come to an understanding of the risk/return nature of doing business on open terms … and the challenge of doing business on credit in the open market.

Further, through this knowledge will come your opportunity to use what you have learned to your advantage, and to the end of achieving a major corporate objective – maximizing profitable business.

Where does an Associate fit?

Knowing how you and your department fit into the overall company group of relationships will better enable you to function, grow, and thrive in the YC family of entities.  So, how do all of these groups fit together?  Can there indeed be a “fit”?

Read on, and find out how you and your group can promote more top- and bottom-line growth.

What are the major company groups of interest?

 Sales and Marketing:

In the ordinary course, these are associates both inside and outside the company chartered to find buyers for its products and services.  Sales is responsible for initially establishing and then developing customer relationships to a higher level of engagement in order to promote higher levels of buying.  Traditionally, the overall customer account management process is generally held to be resident in the sales organization. Marketing associates manage the flow of products from manufacturers at a cost most beneficial to the firm.

Credit and Accounts Receivable

Traditionally, associates responsible for:

  • processing new account applications,
  • researching trade and financial information of customers,
  • establishing and controlling credit lines, collecting trade receivables within terms,
  • expeditiously addressing seriously past due trade receivables,
  • legal issues and bankrupt trade customers through third party intervention,
  • managing the order release process,
  • reconciliation of open trade items, the application of trade payments, credits and debit items received
  • expediting the refreshment of credit lines, the charge off of uncollectible trade receivables consistent with corporate bad debt control objectives.

In some organizations, credit and accounts receivable are under separate management responsibilities in order to manage a separation between associates. who collect trade payments and identify adjustments, and associates who apply those trade payments and adjustments.

Customer Services

Associates manage the difficult issues surrounding returns, delivery disparities and other problems relating to shipping.  Often, open trade receivables items are the result of credit due, or disputes in items shipped and billed.

The speedy resolution of these discrepancies contribute to customer satisfaction and enhanced customer engagement … sales.  These contacts will be instrumental in resolving issues, and in conjunction with sales associates and credit associates, will provide evidence of enterprise customer focus, while keeping open credit available … for sales.

I.T., The Computer Connection

These associates manage the process of developing and implementing computer-enhanced support for the corporation.  They are a critical link in the customer development process, particularly where electronic interchange with the customer is desirable.

Logistics and Distribution

Associates responsible for receiving orders, picking, packing and delivery of goods to customers.  They represent the physical movement of the goods to the customer.

Finance, Treasury and Tax

Associates responsible for the accounting for, and financing of our operations.  Partnering with sales, these associates insure that activities of the firm result in maximum profit as well as sales.

In most organizational structures, credit functionaries report up through the chief financial executive, to insure independence of decisioning (in favor of profit, as against pure sales).

A Simple Case

A common (ideal) transaction for YourCo (YC), a distributor of computer and related products and services, might occur as follows:

  1. Reseller customer ARC orders a hard drive, valued by YC at Euro 150.00.
  2. ARC does so by “charging” this purchase against their approved open line of credit of Euro 10,000.
  3. Stated terms of the sale to ARC are net 30.
  4. The hard drive is in stock and is available for immediate shipment.
  5. The order ships on standard, two-day ground delivery terms to ARC.
  6. Delivery occurs in ordinary course, without delay.
  7. Invoice is mailed upon shipment.
  8. Payment is received according to terms.
  9. Transaction payment and open receivable are netted
  10. Credit line is relieved of the liability of the transaction and renews for future purchases.

It is the objective of the process that every customer buy/sell interaction proceed as above.  However, it will still require serious commitment from both YourCo and the customer to ensure that the expectation of both parties … our valued customer and YC… are met. *
n addition, not all parties will have the SAME expectation.

For example:

  1. The customer, ARC – expects YC to accept, pick, pack and ship order to arrive at 9 AM, next day, (on order date + 2 days), with no additional contact.
  2. Sales – expects purchase order confirmation, completion of 1) above, customer satisfaction, and timely payment for the transaction which enables additional buying potential.
  3. Credit – expects to review the pattern of customer behavior (performance ) in order to determine risk and loss probability of the transaction and foster growth of the customer relationship.
  4. Accounting – expects notice of shipment to be received in a timely manner so that invoice can be expedited and revenues recorded. Low maintenance requirements.
  5. Product Marketing – expects to have facilitated the correct product in stock and available to pick, pack and ship from the most cost effective warehouse.
  6. Warehouse personnel – expect to pick, process and ship the correct product with maximum efficiency, within allocated time period.
  7. Collection associates – expect the timely receipt of payment for the transaction, in a fashion which achieves YC cash flow objectives and relieves ARC credit line expeditiously to enable additional purchases without interruption.

This process flow is to be repeated as many times as possible, consistent with the unit fiscal plan selling objectives.

This example is such a simple reflection of the reality of our business, that a reader might be led to wonder why at times, it seems so difficult for companies, any company, even YC, to achieve its opportune fiscal objectives.

Bear with me … the plot thickens.

No doubt the reader has surmised that there are forces beyond those described above that affect these interactions.

These might include:

  1. Market conditions at the time of the order placement.
  2. Customer business condition at the time of the order.
  3. Sales order receiver frame of mind at time of order.
  4. Credit associate frame of mind at time of order release review.

Wait a minute………..

This would seem to suggest that there is strong dependency on the frame of mind (attitude, training, development, competency, and confidence ) of every human involved in placing, receiving, processing, releasing, and satisfying the order.  Or, differently stated … It may be suggested that we are all involved in the customer relationship development process.  In fact, it might further be suggested that to the degree the YC associate has been more completely developed, they are better able to promote stronger customer relationships, more robust selling … and a higher level of achievement, for themselves, their group … and for YC.  Now you understand why you have chosen to review this monograph.

Read on!                                                                   


The issue of communication… that is, insuring the transmission of facts to the right resource at the right time. Our interest is focused upon:

A) What is the information communicated
B) When is the information communicated
C) To whom is the information communicate
D) How is the information communicated

Naturally, there are material differences in ultimate satisfaction, time to process and cost of the transaction, associated with the less-than-optimal achievement of the elements noted above.

A) Discuss with any sales associate the confusion, delay, lost revenue and profit, as well as cost consequences  of  customer placement of an order for the WRONG product.

Tales of negative margins, delay in satisfactory receipt by customer, return product approval requirements and delays, consequences, added transaction costs, lost compensation, credit line blockages, lost sales turns, added account maintenance … and on, and on…

Well, that was fun.

B) How about the order which is received just minutes prior to the cutoff period for optimum handling through the most advantageous ( to both parties ) warehouse supply location.

Naturally, there will be the added pressure of additional contacts necessitated by the late placement and the ever-present need to receive the goods at the customer or end user location TOMORROW … naturally, because of our close relationship with the customer, at additional cost to customer.

The authorizations necessitated by the exceptions raised will further delay processing the transactions. The failure of our customer to communicate in a timely manner has created substantial risk of poor, or non-performance. Unless the ramifications of this late placement are conveyed professionally to the customer, we stand the chance of failing to meet customer expectation. A serious consequence.
Wouldn’t it be nice if we could put the following notice on the web…

” Please be advised, failure to properly prepare on your part does not constitute a crisis on our part “!           Dream on!

However, know that these events of challenge provide opportunities to differentiate YC from the competition. Know that part of the challenge of doing business in any market is the challenge to assist customers to obtain the best possible service from YC. Our improved communication with each other should and with the customer is an opportunity to assure that these crises are infrequent.

Another opportunity to engage more closely with our customer seized..

 A thicker plot yet

C) Have you ever left an important message with someone other than the intended party ??? What were the risks.. and consequences ??Here, risk avoidance is the key. If you must leave a message of importance with a related party, make certain to follow up with a confirmation to the proper party.

Also, remember , discussing sensitive information or business condition details ( credit line, past due balances, credit due , etc.) beyond certain key individuals at the customer location, might jeopardize an otherwise beneficial relationship.

And finally…

D) ” I left a voice mail , did you not get confirmation of the quote ???

“… from a fictitious deposition taken in a lawsuit charging business impairment by YC in failing to provide quotation to customer by 5pm, as agreed, which prevented customer from providing the necessary information on a quote for which they had been preselected. The result to the customer was the loss of a $ 10.0 M opportunity. ”  Real ?  No. Possible ? Absolutely.  Remember, failure to properly and timely communicate, can cost.

Fictitious, yes. Stretching the imagination, yes . However, certainly plausible and definitely relationship damaging. The point is made.

The circumstances will dictate the best, and most effective mode of communication …common sense will take care of the rest.

If conveying a legally binding document, send it electronically by facsimile and confirm receipt. The time expended will both demonstrate your commitment to service and customer satisfaction , both market differentiators.

This was a beefy section. Let’s take a moment to review. If you have any question of the appropriate action… escalate, consult, coordinate and act.

Then, learn from the experience. It will become part of your corporate memory, that which makes you a more highly valued resource of YC.

Well, that about covers the very basic aspects of communication.

We probably agree that communication skills are crucial to our success. That must give rise for the need to provide correct and complete information both to internal and external customers.

What ?? Another new concept… internal and external customers. What is that all about ?  Not necessary to panic.

Internal customers consist of your peers and associates throughout your local and the extended YC. Together, you will insure that we maximize value… your value, their value and YC value in the market.

Our traditional stakeholders, external customers, include vendors, purchasing customers, financial providers, etc. also critical recipients of our communication. Just ask the investment managers who participate in our quarterly business briefing how they feel about our communication. The answer is found in the stock price of the next market opening.

Now then, not so difficult was it ? The key to successful communication is the conveyance of concise, correct facts in a timely manner. Get it right the first time. If you do not have the time to do it right the first time…

How will you ever find the time to fix the problem a second time??

Simply put, Credit associates :

  1. Receive and review new open credit applications expeditiously.
  2. Establish open credit lines consistent with corporation guidelines.
  3. Analyze ongoing account information and render regular credit line recommendations consistent with the corporate appetite for risk and customer performance.
  4. Manage the order release process to maintain maximum throughput and timely release consistent with corporate order process schedules.
  5. Manage the open credit line availability to enable maximum flow of profitable orders.
  6. Collect all non-disputed open receivables.
  7. Bring to timely resolution all open, disputed items.
  8. Perform the above in a manner consistent with the performance objectives of the corporation.

Now you know what credit associates do and why they do it. This provides you with tremendous advantage in utilizing these resources to help drive incremental business. Take the time to discuss your particular problems and opprtunities with Credit Services personnel today and turn your discomfort into motivation as together, you find solutions … and business.

This document is proprietary to Professor Patrick O. Connelly and the Tao Institute for credit and Risk Management, and must not be copied without express permission of the author. Please direct inquiries to: Professor Patrick Connelly, CEO, Tao Institute for Credit and Risk Management, Clearwater, Florida, USA.
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